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Posted On: 6/25/2003

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Nestle S.A., long a leading North American purveyor of confectionery and hot beverages with substantial presence in the convenience food and ice cream businesses, also has grown dramatically in the provision of small-package bottled water worldwide. In 2002, Nestl�© Waters further strengthened its presence in this fast-growing category, reporting 9.6% organic growth in sales. The Nestl�© organization enjoyed record sales, net profit and cash flow last year (see VT, March).

The company reports that its water sales are maintaining that pace, exhibiting double-digit organic growth (approaching 11%) in the first quarter of fiscal 2003.

During 2002, Nestl�©'s water business generated earnings before interest, depreciation, taxes and amortization of 696 million Swiss francs (more than $515.4 million U.S. at the present rate of exchange). Seven acquisitions brought additional sales of 135 million Swissfrancs (almost $100 million). Distribution was strengthened in small formats in the United States, and in home and office delivery in Europe.

For the first quarter of 2003, the company reported growth (at constant perimeter and exchange rates) of 10.9%. In Europe, Nestl�© consolidated its leadership in the home and office delivery (HOD) channel with two key acquisitions. And it launched "Eau de Perrier" in conjunction with a number of innovations.

At the end of fiscal 2002 (December 31, 2002), sales had reached 7.7 billion Swiss francs, or just over $5.7 billion U.S. That figure represented an increase of 4.1% over 2001 results. Exchange rates had a negative impact of 7.5%, while a change in the sales perimeter had a positive impact of 2%. In absolute terms, Nestl�© Waters' EBIDTA increased by 11.9% over the 2001 figure. This provided a margin of 9%, compared with 8.4% at the end of the prior year. Nestl�© Waters reinforced its world leadership in bottled water, with a 17% market share (in terms of value).

Last year, Nestl�© Waters recorded 48% of its sales in North America, and organic growth here of 13.2%. It made 45% of its sales in Europe, and grew 4.7% in that market. Asia/Oceania generated 3% of sales, but exhibited the greatest organic growth (21.7%), followed closely by Africa and the Middle East, with 2% of sales and organic growth of 21.5%. South America also represented 2% of sales, and displayed organic growth of 6.3% (with growth stated in terms of constant sales perimeter and currency exchange rates).

Nestl�© explained that growth last year was achieved despite a variety of difficult market conditions. In North America, 2002 saw "the arrival in force" of the major soft drink companies in the small-package bottled water arena. In Europe, growth in premium brands weakened as low-priced brands entered the market. In South America, the economic situation was highly unfavorable (and not just for Nestl�©). In Asia, Africa and the Middle East, price competition was fierce. However, in all areas, Nestl�© recorded growth rates greater than overall market growth.

Nestl�© Waters' business model involves assembly of a worldwide network of brands available in all distribution channels. These include international brands ("Perrier" and "S. Pellegrino," for example, as well as "Contrex," "Vittel" and "Acqua Panna"); Nestl�©'s own brands, "Nestl�© Pure Life" and "Nestl�© Aquarel" - a relatively new development; and local brands. In the United States, these include "Arrowhead," "Calistoga," "Deer Park," "Great Bear," "Ice Mountain," "Ozarka" and "Zephyrhills." During 2002, the 70-odd local brands around the world accounted for 75.7% of sales, and enjoyed organic growth of 8.6%. The five international brands generated 21.8% of sales and chalked up an 8% organic growth rate. The two "Nestl�©" brands produced 2.5% of sales, but organic growth was a robust 68.3%.

These three brand tiers allow the company to tailor its marketing strategy to the characteristics of each market area. For example, it focuses on strong brands in high-income, low-risk markets like Europe and North America. In other regions, Nestl�© is fostering growth of its "Pure Life" brand while pursuing a program of targeted acquisitions and strengthening local positions.

During 2002, the company reported strong organic growth, 18.1%, in small-format bottled water distribution in the United States. This represented an increase in market share of 4.6%. In France, the company launched "Perrier Fluo" (available in three flavors), and it surpassed sales forecasts almost immediately. Nestl�© Waters also accelerated its growth in the home and office delivery segment throughout Europe, building on its experience in the United States. In this country, HOD accounts for 30% of bottled water sales, and Nestl�© enjoys a leading position.

For the first quarter of 2003, Nestl�© Waters continued to surmount difficulties around the world. Sales reached 1.719 billion Swiss francs (about $1,275,000,000 U.S.). Chief executive officer Frits van Dijk predicted that, during 2003, growth will continue to outpace the market and operating margins will enjoy further improvement.